What is Project Cost Tracking?
Project cost tracking is the process of monitoring and recording all expenses related to a project. It involves comparing actual spending against the planned budget to identify cost overruns early and determine overall profitability.
Why Is Tracking Project Cost Important for Your Business?
It Helps You Understand Project Profitability
Project cost tracking allows you to track how much a project costs from start to finish, and compare it with how much you earned. This helps you to clearly understand if the project made a little to no profit or resulted in a loss.
With that insight, you can make better decisions about the types of projects you take on and how you manage them.
It Prevents Overspending
Projects don’t always go exactly as planned. Sometimes, extra hours, unexpected expenses, or changes in tasks can quickly increase costs. If you’re not tracking these changes in real time, you may not notice them until the project is complete. However, when you track your project cost, you can monitor your spending in real-time, stay within budget, and fix any issues before they escalate.
It Helps You Set More Accurate Prices
Tracking your project cost helps you understand the weight of each project. With this knowledge, you can avoid past mistakes, manage time, budget more effectively, and make smarter choices on future jobs.
Top 4 Ways to Track Project Costs and Expenses
Create a Precise Cost Estimate
Before you track a project’s cost, start with a clear plan. Break the work that has to be done into smaller tasks, set a timeline, and list what each process will need. Then go ahead to estimate all costs: your time, tools, software, and any other expenses. When doing this, aim for accuracy. This makes it easier to set a budget and track your spending as the project moves forward.
Establish a Baseline Project Budget
Before starting any project, it's important to set a clear budget. Whether it’s based on a formal quote or internal estimate, you'll have to outline expected costs for labor, tools, materials, and other expenses. This will serve as your financial benchmark to compare all actual spending with.
Track Costs in Real Time
This is one part of project cost tracking you should never skip. As your project runs, be sure to track internal labor, such as hours, and external expenses, like vendor bills, in real time. To make the process easier, you can make use of tools or software that allow you to record these costs so you’re not doing everything by hand. It helps reduce mistakes and keeps you updated on your expenses.
Review Budget vs. Actuals Regularly
Make it a routine to compare your estimated costs with what you’re actually spending weekly or monthly, depending on your workflow. Be sure to also monitor the hours spent, income, expenses, and profit margins. This helps you catch any overruns early and make smart adjustments to your budget or timeline.
How to Calculate Project Costs
Hourly Basis
Hourly pricing is one of the most straightforward project cost tracking methods. It’s based on the actual time spent working on a project, multiplied by your hourly rate. This approach works best for projects where the details of the work aren't fully planned out yet or where things might change as you go.
For example:
Let’s say you’re a freelance designer working on a landing page project. You might decide to break your time down like this:
- 4 hours for planning
- 6 hours for design
- 12 hours for development
- 4 hours for testing
- 2 hours for communication and admin work
That gives you a total of 28 hours. So, if you charge ₦90,000 per hour, the total cost would be: 28 hours × ₦90,000 = ₦2,250,000. This pricing method is best for freelancers, consultants, and teams handling tasks where the client may request changes along the way.
Pros
• You have the flexibility to adjust your cost as the project evolves.
• Clients pay only for the actual time spent.
Cons
• This method requires accurate time tracking to make sure you’re paid fairly for all the time you’ve spent on the project.Flat Rate
Flat rate pricing involves setting a fixed price for the entire project before any work begins. It’s best used for projects with a clear plan, timeline, and deliverables. This method gives both you and your client a clear understanding of the total cost, with no surprises along the way.
Here's an example of how this works in practice:
Let's say you’ve just been asked to create a full brand identity for a startup. Since you know how much effort this typically takes, you can price it this way:
- ₦50,000 for brand strategy
- ₦30,000 for logo design
- ₦10,000 for choosing fonts and color
- ₦100,000 for writing a brand style guide
- ₦75,000 to cover admin tasks and minor revisions
Your total flat fee is ₦265,000.
Pros
• It's easy to predict budgeting for clients.
• It encourages efficient and focused delivery
Cons
• You take on the risk if the project details or requirements change later on.Cost-Plus Pricing
Cost-plus pricing allows you to charge for all the actual costs involved in completing a project. Some of these costs can include labor, materials, overhead, and a set profit margin. This pricing method is a good fit for larger or more complex projects where the final costs might not be clear upfront but still need to be covered.
For example:
If you're leading a retail renovation project and keeping a close eye on expenses:
- Starting a project without a thorough cost estimate can lead to serious budgeting issues down the line. A high-level estimate might seem sufficient at first, but without a step-by-step breakdown, you risk underpricing and poor profit visibility. This can make it difficult to manage expectations, control spending, and accurately estimate profit margins.
So far, you're at ₦1,000,000 in costs. Add your 20% markup, and your final invoice is: ₦1,000,000 + 20% = ₦1,200,000
Pros
• It protects your profit while covering all expenses.
• It allows flexibility for cost changes.
Cons
• It requires detailed recordkeeping and transparency.Value-Based Pricing
Value-based pricing is based on the results your work delivers rather than the time or materials it takes to complete. For this method, you set your price according to the value your work creates for the client. You can factor in increased revenue, efficiency, or growth. Value-based pricing is ideal when your impact can be clearly measured and tied to business results.
Here's how it might look in practice:
You run a marketing campaign for an e-commerce brand, and by month three, their sales jump from ₦100,000 to ₦500,000 per month.
That’s ₦600,000 in added revenue over three months.
Instead of charging for hours, you set your fee at 15% of the value created: 15% × ₦600,000 = ₦900,000
In this case, your pricing reflects the impact your work brought and not just your effort.
Pros
• It allows for premium pricing based on expertise.
• It lets you align your compensation with client results.
Cons
• It requires strong confidence in your value.
4 Common Mistakes to Avoid When Tracking Project Costs
Not Creating a Detailed Cost Estimate
Starting a project without a thorough cost estimate can lead to serious budgeting issues down the line. A high-level estimate might seem sufficient at first, but without a step by step breakdown, you risk underpricing and poor profit visibility. This can make it difficult to manage expectations, control spending, and accurately estimate profit margins.
Tracking Project Costs Manually Across Multiple Tools
Manually tracking costs across spreadsheets, inboxes, and apps can make it difficult to maintain accuracy and consistency. To streamline cost tracking and improve visibility, it’s best to use project accounting software that records expenses and income in one place.
Ignoring Small or Indirect Costs
Overlooking things like subscriptions, small fees, or time spent on routine tasks can quietly reduce your profit. These indirect costs add up over time. So, if you're only tracking major expenses, you may be missing the true cost of the project. To help with this, you can use a reliable tool that captures both direct and indirect costs for a more accurate financial overview.
Skipping Real-Time Tracking
If you’re waiting until the end of the week or, worse, the end of the project to track hours and expenses, you're already behind. This is because costs can pile up quickly, and it's easy to lose certain details. Tracking in real time gives you better visibility and control over your budget as the project moves.
Turn Cost Tracking into Real Project Insights With Esemie
Running a small or medium-sized business isn’t just about doing great work. It also means staying on top of your finances. Esemie’s project accounting tool makes project cost tracking easier. It allows you to monitor expenses, track income, and generate invoices, all in one place.
If you're a freelancer juggling multiple projects or a small or medium-sized business owner managing a growing team, Esemie was built for you. It gives you the clarity you need to see which projects are actually profitable. With better visibility into your income and expenses, you can price your services more accurately and make smarter financial decisions.
Do you need an easier way to handle invoicing and track expenses? Esemie helps you do both. Start using our software today.